I've asked my friend, colleague and fellow gold investor Tom Cullis
to explain a somewhat complicated concept known as
At the surface, this concept may appear to be nothing but a simple
call to return the dollar or other world currencies to the gold
standard. But that's not quite the whole story. It's not even what
Free-Gold is really about.
I'm really excited to have Tom delve into this concept, because I
believe it's just starting to gain momentum, and it's rapidly
approaching a "tipping-point" moment. I think you'll be hearing a
lot about Free-Gold - at first from people like me, but then
increasingly from mainstream investment sources and eventually you
won't be able to turn on the TV or open a newspaper without hearing
And before I ask Tom to step into the mysterious waters of
Free-Gold, I want to assure you that
this series of essays is not a part of a Free-Gold sales
. We're not selling Free-Gold. Free-Gold is basically just a very
high-level way of thinking about what's going on with the world's
money system right now. The only thing we're likely to tell you as
a result of understanding Free-Gold, is something that you probably
already believe: you need to own physical gold, and not just a
Regardless of how you feel about the dollar, or the gold standard
or any other money system, the concept of
is something I think you need to be at least somewhat familiar with
- especially if you already own physical gold or you're thinking
about buying more.
Without further ado, here's Tom:
Before I get into the nitty-gritty of how Free-Gold works, I have
been asked to quickly and simply describe Free-Gold. It is a
complex subject, and I will go into more specific detail, but in a
nutshell, Free Gold advocates that you own and hold physical gold
first and foremost.
Okay...now into the nitty-gritty, because it's not enough to know
what to do, it's much more important to know why...
The major challenge that investors, economists and even the general
public face these days is figuring out what major causes are behind
the historically significant (and scary) swings in the markets the
past few years.
Precious metals, commodities, equities and bonds have all gone on
roller coaster rides and have shaken (and bankrupted) many who
didn't have a strong grasp on what was going on. The conclusion
many economists and investors have come to is that the US Dollar is
facing a crisis in the near term and the financial players big and
small who believe this are positioning themselves for the
Before you can safely put together a portfolio to profit from this
type of change you have to first have a good understanding of what
will come after the collapse of the world's reserve currency. Many
possibilities have been suggested from the Special Drawing Rights
of the IMF replacing the dollar to the return of the gold standard.
Free-Gold is an alternative that recognizes the flaws
inherent in the reserve system, be they physical or fiat, and
embraces the possibility that a reserve currency need not
Free-Gold is in essence a solution to the major problem in the
financial world and the one question that needs to be answered
before real economic growth can resume.
How are all the losses that are built into the current
system going to be distributed?
To get from where we are to a solid understanding of Free-Gold we
have to consider both the economic and political ramifications of
getting out of the mess we are in.
To defeat your enemy you must first know your enemy and the foe we
face is debt. To be more specific, it is low interest bearing debt
which exposes the hidden problem with Keynesian and Monetarist
economics, and the reason it seems to work great right up until it
Here's a brief history of Keynesian policies in this country:
The late 1940s through late 60s were boom times that gave the
appearance of control and almost prescience by the Fed that would
enable the economy to stroll into the future only experiencing
The stability of the 80s and 90s revived this myth right up until,
again, the point that it all stopped working. Expansionary
economics, that is growth based on an expanding money supply, works
on the idea that continually increasing the value of assets makes
people both feel richer and want to invest more.
of watching your stocks and home rise in value year after year
leads to more consumption because why not spend more if every
signal you get is that you are making more? Higher returns also
encourage people to invest more as well. Obviously it is impossible
for people to actually invest and spend more simultaneously in this
way based on higher stock and home prices which is why this
"growth" is based on borrowing and leverage.
That's where we are today. In the recent past we saw the creation
of CDS, CDOs, interest rate swaps (as well as many other "wealth
inventions") as ways to trade small percentages of interest without
actually moving anything physical or even tangible!
Expansionary policy works by lowering interest rates. Lower rates
make it cheaper to borrow money which means servicing debt is
cheaper and more money can be borrowed. Ultimately projects can be
bigger (the largest buildings in the world are built right as
bubbles are bursting) and more expensive because of these lower
Lower rates also make older loans made at higher rates more
attractive. If the prevailing rate is 8% and I hold loans that are
likely to be paid off at 10% you have to offer me a premium to get
them onto your balance sheet. I think we can all see where the big
problems come in- when rates simply can't go any lower the
opportunities for this type of growth vanishes seemingly overnight.
Debt at record low rates is such a huge problem because
rates have no room to go down and as rates rise, assets are hit
with the double whammy as the above process reverses.
The only other option is holding rates constant which leads to
years without growth while piling on more and more debt (hello
Japan) with each year making the prospect of increasing rates more
This is why we must accept that debt is our enemy and the only
question we face is who is going to take the pain and how.
You might think you already know the answer to this question
part two of this essay
in which I explain how Central Banks and Governments have no choice
but to pass on these bad debts onto everyone who owns dollars and
dollar denominated assets.
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